Prokhorov Buys Brooklyn Nets And Arena From Ratner For $1.7 Billion

CHICAGO, IL - DECEMBER 21: Brook Lopez #11 of the Brooklyn Nets moves against Taj Gibson #22 of the Chicago Bulls at the United Center (Photo by Jonathan Daniel/Getty Images)

Onexim has bought the 20% of the Brooklyn Nets and 55% of
Barclays Center operating rights it did not already own from Nets Sports & Entertainment for $1.7 billion. Onexim is controlled by Russian billionaire Mikhail Prokhorov and Nets Sports & Entertainment is a subsidiary of publicly traded Forest City Enterprises, run by Bruce Ratner.

The $1.7 valuation is the second-highest ever given an NBA deal, behind only the $2 billionSteve Ballmer paid for the Los Angeles Clippers last year.

The transaction values the team at approximately $875 million and the arena at $825 million, inclusive of debt for each asset. NS&E currently owns a non-controlling 20% equity interest in the team and a 55% equity interest in the arena business (the building and real estate are owned by the state of New York). Forest City owns approximately 62% of NS&E. NS&E expects to receive proceeds from the transaction in a combination of cash and notes receivable of approximately $285 million at closing. The notes receivable are expected to approximate 75% of the total proceeds, bear annual interest at 4.5%, and be payable in three to five-and-one-half years from the date of closing.

Almost a year ago, we valued the Nets and the arena operating rights at $1.5 billion, sixth-most in the NBA. At the time, I believed that the basketball team would not be able to get a richer local television deal. But I was wrong. The team recently inked a new deal with Fox owned YES Network that reportedly more than doubles its annual rights fee from the current $20 million a year beginning with the 2017-18 season.

We estimated the Nets posted an operating loss (earnings before interest, taxes, depreciation and amortization) of $99 million during the 2013-14 season. The Barclays Center had a net loss of $32 million during the fiscal year ending June, 2015 and generated net income before related party interest and non-cash items of $17 million. That said, the Nets and arena could soon become profitable.

Last year, the NBA announced expanded, nine-year media partnerships with Turner Broadcasting (TNT) and Walt Disney Company (ABC and ESPN) that begin with the 2016-17 season, in which the average annual rights fees associated with the NBA alone will increase to approximately $2.5 billion from $897 million annually over the current eight-year deal. In the first year of the new contracts, teams are expected to receive $68 million each, about double what they will receive this season. Coupled with the team's new local cable deal, total television revenue for the Nets should increase by about $50 million in the 2017-18 season versus the current season.

The team has also been cutting its payroll. During the 2013-14 season the Nets paid players a league-high $103 million. This season payroll is down to $83 million.

I recently ran into a former employee of the Nets and asked him if he thought Prokhorov would keep the Nets or sell them after he bought out Ratner. "One day he wakes and wants to sell. Another day he wakes up and wants to keep the team," he said not for attribution.

He then added: "I don't believe for a minute that he (Prokhorov) is going to bring in $400 million of cash to invest in the team as some have written. Not with what is going on geopolitically. And I can tell you his other businesses are hurting."

My mentors were James Walker Michaels, Geoffrey N. Smith and William Baldwin. I started out in the statistics department of Forbes in the mid-'80s then transitioned to writing. I mainly wrote about high-priced stocks that I believed were doomed. Example: my story on CUC Int...